Central Banks Decision’s Top the Global Markets

The European Central Banks decision was the main driver of the changes in the European financial markets and the euro’s recent moves. Monetary policy makers kept interest rates unchanged, at historically low rates, and the ECB’s President Mario Draghi’s speech shadowed the decision. This leaves the door open for fresh interest rate cuts.

 

The euro reacted positively after the release of the ECB’s statement, but the rise did not last long as Mario Draghi’s press conference in April started, which knocked the euro and caused wide fluctuations for the single currency.

 

Generaly Draghi’s speeches have a great impact on the Euro especially when he points out that interest rates will remain low for a long period of time and that stimulus measures may expand if the European economy requires it. At the same time Draghi recently launched a counterattack against German banks, warning that they could delay a return to higher European growth rates.

 

Angela Merkel considered the criticism given by the Finance Minister and some conservative politicians on the ECB monetary policy are excessive, according to a local  German newspaper "Handelsblatt". The newspaper pointed out (without mentioning a specific source) that, Merkel told the German Central Bank’s president, Jens Weidmann that she believes the criticism faced by the ECB from German officials are "excessive", welcoming Weidmann’s defense for the ECB's policies and his boss, Mario Draghi.

 

Euro zone business growth fell unexpectedly in April despite the new price reductions which should disappoint the European Central Bank a day after leaving the monetary policy unchanged.

 

It seems that the strong stimulus measures adopted by the European Central Bank had no significant effect on either inflation or the growth of the private sector. In March, the ECB had cut interest rates and expanded the purchases of bonds and offered loans at a low interest rate to banks in an attempt to raise the inflation rate. Also, it is predicted that the ECB will start buying corporate bonds in the second half of this year.

 

All eyes are now looking at the Federal Reserve, which is likely to keep interest rates unchanged, but may indicate a rate hike in June, followed by another hike by the end of this year.

 

During its last meeting in March, the Federal Reserve acknowledged that the global risks to the US economy justifies holding the monetary policy unchanged and is predicted to raise interest rates twice this year, which is half the number that was expected in December 2015.

 

The remarks by the Fed members came to confirm the Fed’s intention not to raise interest rates during the first half of this year, at least because of the risk of a global slowdown which was led by China as its debt rate rose and jumped up to 237% of GDP during the first quarter of this year, amid growing concerns about the possibility of a financial crisis in the country. The Chinese debt accumulation rate is disturbing, as the debt rate has jumped 148% from 2007.

 

The Fed is carefully watching the figures from China, the main trading partner of the USA. It is expected to see the drop in the Chinese market spread to affect the US economy, which may push the Fed to be cautious in raising interest rates to protect the US economy from the repercussions of the Chinese slowdown on US exports, which represent nearly 13%.

 

They are also keeping their eyes on inflation rates after an unexpected decline in February’s figures before recording some recovery in March after wage rates supported the consumer prices last month. The Fed is targeting a 2% annual inflation level and to support the industrial sector, which is considered as the backbone of the US economy.

 

Generally there is a strong focus on Yellen’s press conference’s, which may increase the USD’s volatility depending on media questions during the conference’s, they may focus on global growth and the ability for the US economy to face a global growth shock.

 

From Asia, officials from the Bank of Japan said that the Japanese government will take appropriate measures to improve and strengthen economic growth, stressing that the Bank of Japan sees the Japanese economy possibly not needing more fiscal spending, and the implementation of economic reforms must soon be seen to ensure the return of stability in the economy and strengthen growth rates.

 

On the other hand, they noted that the Japanese Central Bank will monitor the financial markets and economic data to decide fiscal and monetary policies, the bank is heading for diligent oversight of the economy before making any decision to increase stimulus measures for the economy.

 

The Japanese Finance Minister released a statement saying that the Japanese government plans to provide additional budget to the parliament by the middle of next May, and although there is no plan at the moment to support economic growth, the government is seeking to raise the sales tax in order to keep confidence.

 

While pressure is mounting on the Bank of Japan due to the yen’s strength, it may find itself forced to take more stimulus measures during the next period, and may include an increase in its asset purchase programme or may extend the maturity period, or maybe even use both together.

 

According to a report published by Bloomberg the Bank of Japan is considering offering negative interest rate loans to banks and may cut interest rates further. The report stated that the Bank might consider this new step if policy makers decided to cut the -0.1% interest rate, which is applied to some of the surplus balances of banks deposited with the Central Bank.

 

The yen rose around 10% against the dollar since the Bank of Japan announced that it will add negative interest to its stimulus program at the end of January, such actions usually weaken a currency.

 

But due to several factors combined which pushed the yen to rise, including risk aversion in the markets, strengthened the demand for safe havens, the rise in real interest rates in Japan, caused the dollar to decline due to expectations of a delay in the US interest rate hike.

 

The Japanese economy has been facing a recession for almost two decades despite all the stimulus measures by the BOJ since Shinzo Abe became the prime minister. He promised voters the return of growth in the Japanese economy, using all sorts of motivational means, which has not achieved much in terms of support for the Japanese economy but contributed in one way or another to prevent the Japanese economy from dramatically sinking into a recession.

 

The main reason for the lack of the Japanese recovery is the demographic composition in Japan, where the average age is 48, which means that Japanese society lacks young people in the workforce. All the stimulus plans will not work without the intervention of the Japanese government to modify the popular behavior with some stimulus to support the demographic composition.

 

About Shoaib Abedi:

Shoaib Abedi is the Director and co-founder of ICM Capital; a UK headquartered company licensed and regulated by the Financial Conduct Authority (FCA) in London, with six offices spread around the world.

 

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